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The Risks and Opportunities of ClimateChange in Capital Markets
Bren School Corporate Partners SummitMay 2007
Risk and Reward Drivers
Policy EconomicsCapital Market Opportunities
Fiduciary Responsibility
Investment Fiduciary Definition: a person who has the legal responsibility for managing someone else’s money.
— Members of investment committees of retirement plans, foundations, and endowments
— For Trustees of private trusts— Advisors who provide comprehensive and continuous investment
advice
Investment Fiduciaries manage more than 80% of the nation’s liquid investable wealth.
As climate change policy is implemented, fiduciaries will be required to consider risks and opportunities.
“Maginot Mentality”
Traditional investors fail to see that company valuation will need to incorporate climate change risk and reward
Will investment fiduciaries recognize the impacts that climate change will have on their investments?
New factors must be accounted for in corporate reporting
Source: www.maginot-line.com
Policy Response
Future regulatory framework will encompass the following themes:
Policy response to account for externalities
Support for alternative energy (e.g., subsidies and tax breaks) improves the cost competitiveness of new technology, reduces costs through economies of scale, and promotes further technological advances
Reduce the dependence of foreign energy sources
Policy Response
Investment strategies of all types will need to consider the impact of policies and forces related to climate change and their effect on the future business and regulatory environment.
— Command and control— Cap trading system— Tax incentives— Voluntary measures
Corporate leaders are incorporating climate change criteria into their business plans and strategies in anticipation of policy and regulatory changes.
Investors are discovering ways to account for the implications of climate change within their investment process.
Economic Considerations
Direct exposure— Industries and sectors that produce greenhouse gas emissions as
a result of their processes.Mitigation Measures: Invest in low-carbon technology, trade
emissions rights, invest in offsetting projects, and lobby to block or challenge regulation.
— Companies with low greenhouse gas exposure within a particular polluting industry are in a relative strong position.
Economic Considerations
Indirect exposure— Sectors that either manufacture products that emit greenhouse
gases during their use, or offer services that are affected by greenhouse gas regulations
— Sectors with direct greenhouse gas emissions from point sources bear the highest regulatory risks, as these sources are easily monitored and controlled
— Limited ability to adapt— Increasingly located in developing countriesMitigation Measures: Effective policies may need to target the
sectors with high indirect emissions and high ability to adapt
Economic Considerations
Physical Exposure— Sectors whose operations depend on climate conditions— Estimation of physical impacts involves a high level of
uncertainty— Some industries may need to drastically reinvent their business
model — While effects may not be realized for quite some time, certain
industries will take a long time to adapt
Banks Manufacturing Insurance Healthcare
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Tourism Agriculture
Real estate Water utilities
Off-shore oil Fisheries
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Physical exposure to climate change and ability to adaptBy sector or activity
Corporate Analysis
Considerations for corporate success:— If a company operates in a regulatory environment where
greenhouse gas emissions are regulated, when and in what form is regulation expected?
— Has the company’s top management acknowledged that climate change is a fact and a risk?
— Does the company track emissions throughout it’s supply chain? Has the company set reduction targets and a strategy for how to implement them?
— How high are a company’s emissions on an absolute level and relative to its peers?
— Are there business opportunities for climate change mitigation and increased regulation?
Corporate Analysis
Increased corporate disclosure will allow company’s to comply with greenhouse gas regulations and assist investor in making decisions
Company’s with poor track records relative to their peers will carry a higher risk of being negatively affected by carbon regulations
Opportunities for carbon mitigation will emerge— Improving energy efficiency— Increasing the use of low- and no-carbon fuels
Investment Opportunities
Political support is currently the most important driver of outcomes— Which industries will be affected and when?— Financial support? (e.g., subsidies, tax breaks)
Investors will be focused on a “best in class” approach
Emerging greenhouse reduction technologies will come and go. — Some will be wildly successful, but most won’t make it— Those that are not yet profitable are at a higher risk— Those that are supported by R&D spending from large
corporations will have a better chance of sustaining themselves
Investment Opportunities
Building Investment area
Thermal insulation Producers of insulation materials; high performance materials
Lighting LED, fiber optics, compact fluorescent light bulbs
Heating, cooling, and ventilation Integrated systems, IT management, metering devices
Household and electronic goods Energy efficient appliances, built-in power systems
Transport Investment area
LIghtweighting Carbon fiber, composite and lightweight materials
Drive trains Automotive suppliers with innovative technologies, fuel cells
Technology and electronics GPS systems, traffic management systems
Electricity production Investment area
Combined heat and power Independent power producers
Industrial process and materials us Investment area
White Biotechnology Industrial biotechnology, enzyme producing companies
Renewable and low-carbon energies Investment area
Wind Turbine manufacturers, wind park developers
Photovoltaic Entire photovoltaic supply chain
Geothermal Geothermal project developers
Biofuel Biodiesel and bioethanol producers
Hydropower Turbine manufacturers
Investment Products
Equities Bonds Private Equity / Venture Capital
Real Estate
Hedging Instruments
Others
Portfolio screening
Thematic funds
SRI funds
Renewable energy and efficiency stocks
Portfolio screening
Renewable energy bonds
SRI funds
Environmental venture capital
Improved energy efficiency within property portfolios
Green mortgage-backed securities
Insurance
Catastrophe bonds
Weather derivatives
Emissions indexes
Carbon funds
Structured products
Investment Products
* Annualized Returns
Domini 400 Social IndexIndex Total Returns As of 04/30/07
April 2007 Last Qtr YTD One Year* Three Year*Five
Year* Ten Year*
Since 5/1/90 Inception*
KLD's DS400 Index
4.56% -0.18% 4.37% 13.74% 10.16% 7.60% 8.01% 12.13%
S&P 500 4.43% 0.64% 5.10% 15.24% 12.25% 8.54% 8.05% 11.54%
Investment Products
Index Total Returns As of 04/30/07
April 2007 Last Qtr YTD One Year* Three Year*Five
Year* Ten Year*
Since 7/1/05 Inception
KLD GC 100 Index
3.61% 5.87% 9.69% 12.02% N/A N/A N/A 23.63%
Russell 3000 3.99% 1.28% 5.32% 14.48% 13.08% 9.25% 8.59% 15.07%
* Annualized Returns
KLD Global Climate Index 100
Investment Products
Index History (%)Since
Inception1 Year 3 Year 5 Year
WilderHill Clean Energy Index
8.64 -13.08 7.23 2.93
Nasdaq Composite Index 8.14 3.50 6.69 5.59
S&P 500 Index 10.04 11.83 10.05 6.27
* Annualized Returns
WilderHill Clean Energy Portfolio
Market Wisdom - Benjamin Graham
“The intelligent investor is likely to need considerable willpower to keep from following the crowd.”
Benjamin Graham
US-R